Consumer prices reach highest level in months

WASHINGTON (AP) - Consumer prices in February registered their biggest increase in four months, forcing people to shell out more to cover energy, medical and education bills.

The latest snapshot of inflation, released by the Labor Department on Wednesday, raised the chances that the Federal Reserve might have to be more aggressive in its interest rate-raising campaign, economists said.

The government's most closely watched inflation barometer, the consumer price index, jumped 0.4 percent in February. That was a fresh signal inflation is gaining momentum now that the economic expansion is firmly entrenched.

The pickup in inflation came after consumer prices were flat in December and increased by just 0.1 percent in January. The February increase confirmed the more hawkish tone about inflation that Fed policy-makers took on Tuesday.

"Pressures on inflation have picked up in recent months," Fed policy-makers said. They also noted that pricing power - the ability of companies to raise prices to customers - is "more evident."

That assessment accompanied their decision to boost a key short-term interest rate by one-quarter of percentage point, to 2.75 percent. It was the seventh such increase since the Fed began bumping up rates last June in an effort to prevent inflation from hurting the economy.

Sharp increases in energy costs, including gasoline, led the way in February. But many other prices, including those for air travel, medical care, education and lodging also climbed.

Excluding energy and food prices, core prices rose 0.3 percent in February. That compared with a 0.2 percent increase in January and was the largest increase since September.

The CPI report, along with the Fed's new concerns about inflation, led some economists to say they believe the Fed's credit tightening probably will last well into 2006. They also spoke of the possibility the Fed might order a bolder, one-half of a percentage point increase later this year if inflation were to worsen, analysts said.

"Inflation is percolating higher and the Fed will aggressively respond to that," said Mark Zandi, chief economist at Economy.com. He predicted the Fed's key interest rate, now at 2.75 percent, will climb to around 5 percent by late next year.

With the economy expanding, some companies are finding it easier to boost prices, analysts said. A weaker U.S. dollar also is putting pressure on prices of imported goods, which gives American companies more room to raise prices.

Rising inflation can strain the family budget. After adjusting for inflation, weekly earnings of nonsupervisory workers dropped 0.4 percent in February, compared with a 0.2 percent increase in January.

Oil prices, which set a new record high last week, are currently hovering around $54 a barrel.

Economists will watch to see whether high prices restrain consumer spending, the lifeblood of the economy. "Folks who live paycheck to paycheck have seen the biggest bite out of their pockets," said Chris Burdick, director of economic analysis at Schwab Center for Investment Research.

In other economic news, sales of previously owned homes dipped 0.4 percent in February to a seasonally adjusted annual rate of 6.79 million, the National Association of Realtors reported. Even with the decline, the pace of sales still was considered healthy.

Economists believe home sales will cool as mortgage rates are expected to head higher this year.

But home prices continue to rise sharply. The median price for existing homes - where half sell for more and half sell for less - was $191,000 in February, an 11 percent increase from the same month a year ago.